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"Equities And Yields Are Approaching Critical Targets" - What The Charts Say Will Happens Next

With fundamentals officially dead and buried in a centrally-planned world, the only remaining clue we have to "predict" what the algos will decide to do the next microsecond, are charts, because if discounting is dead the only thing that matters is what has already happened.

So, with "both equities and U.S. yields approaching critical targets" according to Goldman, here is what the firm's technical analyst Sheba Jafari thinks happens next.

Both equities and U.S. yields are approaching critical targets. The S&P is nearing a 1.618 extension off the August low at 2,121. The Nasdaq Composite is near an ABC from August at 5,156. U.S. 10-year yields are ticking above an ABC target from October at 2.206%. U.S. 2-year yields have broken above their 0.7314-0.7609% range highs and are now approaching the September spike at 0.8148%.

S&P Index Daily – The index is getting closer to an important target at ~2,120.84. This is a 1.618 extension taken from the August low. It’s also right underneath the highs from April through July which ranged between 2,126-2,135. If this is truly a bullish sequence – the 3rd wave of an impulsive rally that started in August – this could be an ideal place to start a corrective 4th wave. Fourth waves tend to retrace between 23.6% and 38.2% of the length of wave 3 which in this case comes in at ~2,059 and ~2,023. Anything below 2,023-2,020 would however warn that this is in fact a very large corrective cycle; wave 4 should not retrace further than the top of wave 1 which in this case comes in at 2,020

 

S&P Index Intraday – The rally since Sep. 29th has been undeniably impulsive. There is however a potential wedge which has developed on the intraday charts. Wedges are pretty reliable reversal/exhaustion patterns. Would therefore view any break below the bottom of the pattern (the uptrend from Sep. 29th) at 2,097 as a signal that momentum is stalling (start of a retracement).

 

S&P Weekly – What happens next? The chart below is an interpretation of the long-term wave count. In summary, the decline from May is the 4th wave in a 5-wave sequence that started in Jul. ’10. It’s also within a larger degree wave III in a V wave sequence that started at the Mar. ’09 low. The question to ask now is whether wave 4 has really finished (whether wave 5 began at the August low)? If wave 5 really did begin at the August low, the minimum target for this next leg higher is all the way up at ~2,226. Confidence in this scenario would increase significantly past 2,121-2,135. The only small problem with this theory is that wave 4 (from May to August ’15) seems a little too quick/sharp; 4th waves tend to be more complex. Failure to break 2,121-2,135 (and a subsequent decline below 2,023-2,020) increase the chances of a much more protracted corrective cycle which would likely be flat/sideways (1,867-2,035) for a few more months. The end game (a 5th wave rally) should however remain the same.

 

Nasdaq Composite Daily – The index is testing an ABC target off the August 24th low at 5,156. It will be interesting to watch this level as a signal. A break higher than 5,156 would confirm the impulsive nature of the rally and add some confidence to any break higher in the S&P (through 2,121-2,135). Failure to break 5,156 might warn of a broader corrective sequence. The main pivot to the downside is 5,000-4,920. This relatively wide “zone” includes the Oct. 22nd gap, the 200-dma and the previous interim high from Sep. 17th.

 

U.S. 10-year yields Daily – Currently ticking through an ABC target from the Oct. 2nd low at 2.2057%. This is the first time in a while that the market has shown signs of an impulsive rise developing. It should increase the chances of continuing towards a 1.618 extension from October at 2.35%. The next level to watch is the Sep. 16th high at 2.30%. Would view a retracement back below 2.21% as a significant failure.  

 

U.S. 2-year yields Daily – Currently through the big 0.7314-0.7609% pivot area which held a number of highs from Dec. ’14 to Sep. ’15. Because the market failed to hold a break above this level back in September, it would really need confirmation through the Sep. 16th high (0.8148%) to be considered a clear breakout. Any retracement back below 0.7314-0.7609% warns of a potential reversal.

 

EURUSD Daily – The market is currently through 1.0871; an ABC target taken from the August high. As discussed at length in recent updates, a break below this level increases the likelihood that the decline is actually impulsive (a 3rd of 5-waves rather than an ABC). Wave 3 would target somewhere near ~1.0485 (a 1.618 extension from the Aug. 24th high). The next level to focus on stands down at 1.0819-1.0808; the previous lows from July and May. There really is very little immediate support below this pivot until 1.05/1.04. It’s important that EURUSD does not retrace back above 1.0871 going into the rest of the week.

 

DXY Daily – Currently above 97.74-97.81; the trend across the highs since March and an ABC target off the August low. This has a very similar setup to EURUSD except that it looks slightly more like a triangle correction. Either way, the break above 97.74-97.81 helps to confirm the move in EURUSD. The next level higher is 98.15-98.33 (series of peaks from July/August). If this is truly wave 3 of a 5-wave rally, it should have potential to eventually reach 100.27 (a 1.618 extension off the August low). Failure to hold above 97.74-97.81 would be disappointing.